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The Transformative Potential of Blockchain

March 2017

Learn about the key value drivers of blockchain and see which business models are best suited to adopt this strategy.

An Agile Platform for Faster, Safer, Cheaper and Broader Investments

In 2008, Satoshi Nakamoto set out to change the world of finance by using technology to empower people to serve themselves, without banks. He built the Bitcoin Blockchain, which was the first distributed ledger to record ownership through a shared registry that operates without relying on trust. In essence, transactions are recorded on a ledger that all participants can access and each transaction is sealed in a cryptographic block of code. The block of code, once deployed, links to the next block of code in a chain and the information cannot be modified.

What Makes Blockchain So Attractive?

After conducting a detailed analysis of eight of the world’s top ten banks with benchmarking firm McLagan, Accenture published an article in February 2017 that estimates blockchain will afford 50 percent potential cost savings in areas including centralized and business operations – and even up to 70 percent for central finance reporting1. Blockchain has the potential to drive value because it is:

Autonomous: If you want to buy and sell a car today, you have to trust or find an escrow agent. However on this new platform, what you do is simply write the contract, enter the conditions and deploy it on blockchain. Once the contract is deployed, no one can change the code or data or terms of the contract, leading to autonomous trust. Blockchain challenges the need to trust counterparties to fulfill obligations as agreements are codified and executed in a shared, immutable environment.

Auditable: Blockchain establishes asset provenance and full transaction history within a single source of truth, minimizing fraud in the system. All historic transaction details are available in real time. Compliance by code is assured through formal proofs and automatically audited for entire population set. Compare this to the present, whereby if you ask for the details of a SWIFT transaction processed two months ago, for example, it will be a challenge to obtain the information.

Efficient: Blockchain reduces and even eliminates manual efforts required to reconcile events and resolve disputes. For instance, in terms of clearing and settlement blockchain disintermediates third parties that verify and validate transactions and accelerates settlement time.

Liquid: Blockchain reduces locked-in capital and provides transparency into sourcing liquidity for assets. Because ultimately there is so much friction in the system. Think about correspondent banking, most of which is cleared today on a batch basis, once a day. If it takes five days to clear something, there is money stuck in the system. Blockchain eliminates this delay.

According to “The Future of Financial Infrastructure” paper published in 2016 by the World Economic Forum, there are five common characteristics of high potential blockchain use cases:

Shared Repository A shared repository of information is used by multiple parties. For instance, a ledger that stores financial assets in which an owner and owned assets are tracked and shared with other internal/external parties (e.g. regulators and other geographical units).

Multiple Writers More than one entity generates transactions that require modifications to the shared repository. For instance, payments system collectively managed and maintained by a small group of banks, but each bank has millions of end users transacting with their bank.

Minimal Trust A level of mistrust exists between entities that generate transactions. For instance, multiple parties within a trade finance arrangement (e.g. importer, exporter, issuing bank, receiving bank, correspondent banks and customs) that do not “trust” each other and, therefore, institute layers of verification and impose collateral requirements.

Intermediaries One (or multiple) intermediary or a central gatekeeper is present to enforce trust. For instance, removing and/or reducing the importance of a central intermediary, whose primary role is to provide “trust” to the post-trade ecosystem.

Transaction Dependencies Interaction or dependency between transactions is created by different entities. For instance, a situation in which Alice needs to send funds to Bob, then Bob needs to send funds to Charlie. Bob’s transaction is dependent on Alice’s transaction, and one cannot verify Bob’s transaction without checking Alice’s first.

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